This is why you’re special if you care about the stock market

February 4, 2016 | Kim Iskyan

To investors, the stock market matters. When markets fall – as they have over the past month – it means they lose money.

One of the ways the stock market can affect an economy is through the “wealth effect.” This is when spending changes in response to a change in the feeling that people have about how rich they are. So if markets rise and people see that the value of their assets has increased, they spend more, which stimulates the economy. But when markets fall, investors are poorer, and spend less – which also affects the economy.

But to the vast majority of people in many countries in Asia, stock markets don’t matter. They can rise or fall or stay flat – and it would have no impact on their wealth or anything else. That’s because in many countries, a very small percentage of the population has exposure to the local stock market.

As shown in the figure below, in four ASEAN countries – Thailand, Indonesia, Philippines and Vietnam – less than 2% of the population owns a brokerage account. (The figures don’t count the portion of the population that might have money in the stock market through pension programs, or the small number of investors who might have offshore brokerage accounts.)

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A higher percentage of the population of other countries in the region hold brokerage accounts, with Hong Kong the highest at 31 percent. China has many times more brokerage accounts than the rest of the region combined, and more than the U.S. That’s even though more than one-third of Americans hold a brokerage account, compared to 11 percent of Chinese (including retirement accounts, about half of all Americans have assets in the stock market). The wealth effect is more relevant to investors Asia regarding property, which accounts for much more of their wealth than stock holdings.

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It makes sense that, in general, in those countries with the lowest percentage of active investors, the overall size of the stock market (relative to GDP, or total economic output) is the lowest, as shown in the graph below. A smaller stock market suggests a less developed economy, where stock ownership isn’t widespread. (China’s figure is relatively low in part because a lot of its capital markets activity takes place in Hong Kong).

There are many ways to value markets (including valuation measures like the CAPE ratio). Market capitalization, which is the total value of all stocks traded on an exchange, relative to GDP is another way of looking at how a stock market is valued. By this measure, Indonesia and Vietnam are very cheap markets.

As Asian markets develop, the stock market will have more of an impact on the average person and the overall economy. But for now, in the ASEAN region, markets affect few people’s day-to-day lives.

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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